Friday, May 26, 2017

Atlanta Fed: "GDPNow's Second Quarter Forecast: Is It Too High"

From the Federal Reserve Bank of Atlana's Macroblog, May 22:
Real gross domestic product (GDP) growth slowed from a 2 percent pace in 2016 to an annual rate of 0.7 percent in the first quarter of 2017. The Federal Open Market Committee viewed this slowdown in growth "as likely to be transitory," according to its last statement.

Indeed, current quarter GDP forecasting models maintained by the Federal Reserve Banks of New York, St. Louis, and Atlanta have been pointing toward stronger second quarter growth (2.3 percent, 2.6 percent and 4.1 percent, as reported on their respective websites on May 19, 2017).
The Atlanta Fed's model—GDPNow—is at the high end of this range and is also high relative to other professional forecasts. The median forecast for second quarter real GDP growth in the May Survey of Professional Forecasters (SPF) was 3.1 percent, for instance, and recent forecasts from Blue Chip Publication surveys displayed on our GDPNow page show some divergence from our model as well.

We encourage—and frequently receive—feedback on our GDPNow tool, and some users have suggested that our forecast for second quarter growth is too high. In fact, some empirical evidence supports that view. The evidence considered here correlates differences between consensus Blue Chip Economic Indicators Survey and GDPNow forecasts for growth about 80 days before the first GDP release with the GDPNow forecast errors (see the chart below). 
A note about the chart: The horizontal axis shows the difference between the Blue Chip consensus forecasts and GDPNow's forecast. The vertical axis measures the 80-day-ahead GDPNow forecast error, defined as the difference between the first published estimate of real GDP growth and the GDPNow forecast at the time of the mid-quarter Blue Chip survey.

As the chart shows, there is a positive relationship between the Blue Chip-GDPNow discrepancy and the GDPNow forecast error. A simple linear regression would predict that the GDPNow forecast of 3.7 percent growth on May 5 was too high by nearly 1.0 percentage point. Moreover, the chart suggests that there has been a bias in GDPNow forecasts since the fourth quarter of 2015 of between 0.9 and 2.0 percentage points at the time of these mid-quarter Blue Chip surveys. If you are inclined to think the GDPNow forecast for second quarter growth is a bit too high, then this evidence will not change your mind....MORE